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Funding Combination Nullifies Prevailing Wage Exemption

There is some irony in contemplating the demise of state affordable housing programs at this moment. Residential values have taken a major haircut and interest rates are at record lows, the two factors together resulting in new levels of affordability. Nevertheless, over the long run, state programs have served a vital role in affordable housing and from a long term policy perspective, should remain funded and operational. The most recent decision in this area, in Housing Partners I, Inc. v. John C. Duncan, pertains to prevailing wage requirements and the specified exemptions to the obligation to pay prevailing wage on public projects, depending upon the funding source.

California’s prevailing wage requirements are found in the Labor Code at sections 1720-1861. Two commonly utilized exemptions from the obligation to pay prevailing wages involve projects financed through a qualified housing fund or from a combination of qualifying housing funds and private funds (Labor Code section 1720(c)(4), and below-market interest rate funds for projects meeting qualified income and affordability criteria (Labor Code section 1720(c)(6)(E)).

In this case, Housing Partners I, Inc. developed a senior citizens housing project in Redlands. To finance the project, the developer utilized 1720(c)(4) funds and 1720(c)(6)(E) monies. As permitted by state law, a prevailing wage monitoring group requested a prevailing wage coverage determination from the Department of Industrial Relations.

The monitor first concluded that the project met the definition of a public works project, which would typically require the developer to follow prevailing wage law. The monitor then turned to the nuanced question of whether or not a developer who receives funds from two sources, each of which meet the test for the exemption, loses the exemptions if the funding sources are combined. As difficult as it is to imagine that the legislative purpose behind the exemption would be lost if the two sources were combined, that is what the monitor concluded.

That decision was confirmed following an administrative appeal, and by the trial and appellate courts. As the appellate court observed, the legislative goals behind the exemption have to yield to the unambiguous terms of the statutes. In the situation of section 1720(c)(4) funds, the statute qualifies the exemption to circumstances in which those funds are the sole source of funds.

Commentary

When it came to interpreting what the legislature enacted, the director and the court got it right. If there is legislative wisdom to such a restriction, it is far from evident. This case reminds me of Humpty Dumpty in Alice In Wonderland: "When I use a word," Humpty Dumpty said, in a rather scornful tone, "it means just what I choose it to mean - neither more nor less." The moral of this case is to be careful of what you wish for and how you draft legislation.